RMIT University: Global Trade Operations - NAFTA Trade Policy Report

This report provides a comprehensive analysis of the North American Free Trade Agreement (NAFTA), examining its impact on the USA, Mexico, and Canada. It delves into the trade history, freight flow statistics, and various trade policies such as tariffs, subsidies, quotas, offshoring, and foreign direct investment (FDI). The report critically reviews current trade policies, highlighting challenges such as job losses in the USA manufacturing sector, the impact on small firms in Mexico, and trade restrictions faced by USA exporters. It further explores recommendations to improve the trade conditions, including adjusting tariff rates, removing anti-dumping laws, and fostering constructive negotiation processes. The conclusion summarizes the positive and negative consequences of NAFTA, emphasizing the need for ongoing evaluation and adaptation to address emerging challenges and opportunities in the global trade landscape. The report underscores the importance of considering the long-term effects of trade agreements and the need for policies that promote equitable economic growth and development across all member countries.

Running head: GLOBAL TRADE OPERATIONS
Global Trade Operations
Name of the Student
Name of the University
Author Note

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Executive Summary
The purpose of the current paper is to draw the insight views on the characteristics of the North
American Free Trade Agreement (NAFTA). Three signatory member of this trade treaty include
the USA, Mexico and Canada. The paper analyses the consequences of the trade policies since
its accomplishment over the couple of decades ago. Following the implementation of NAFTA in
1994, all the signatories have faced a successive growth in the trade sector. However, severe job
loss in the USA manufacturing sector triggers a great challenge for the economists. On the other
hand, the falling growth in the agricultural sector of Mexico and Canada is the emerging concern
for the policymakers. Both positive and negative externalities are analyzed in this paper. Finally,
some important recommendations are mentioned to improve the trade condition of the member
countries. The USA Government has been proposed to cut the tariff rate which is exceptionally
higher than other member countries of NAFTA.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Brief trade history of the trade zone...........................................................................................3
Freight flow statistics – import/export and freight composition...............................................4
Trade policies..............................................................................................................................4
Some commonly practiced trade policies are defined as follows..............................................4
Critical review of current trade policies.....................................................................................7
Challenges of the implementation:............................................................................................7
Recommendations............................................................................................................................9
Final conclusion.............................................................................................................................10
Reference List................................................................................................................................11

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Introduction
The discussion is aimed at discussing the multidimensional consequences of the North
American Free Trade Agreement (NAFTA). Trade zone is regarded as a duty-free geographic
area where goods are traded under explicit customs regulations. This special area offers trade
facilities for transshipment, export and import operations. Data reveals that the concept is first
evolved during 166BCE when the Romans had developed several free cities featured with
special rules. Thereafter, the establishment of trading colonies in the European and American
countries intensifies the concept of modern trade zone. The evolvement of Shannon, Ireland, in
1959 is documented as the first example of free trade zone in the world (Weisbrot, Lefebvre and
Sammut 2014). This trading concept is now recognized as a free trade zone or special economic
zone. The rationale of the free trade zone is to draw investment, augment employment and
alleviation of the poverty level.
Discussion
Brief trade history of the trade zone
Following the economic emergency of the 1980s, Mexico started leveraging its trade
protection policies. In the meantime, the country had reported to sign free trade agreements with
the EU, Japan, and countries of Central and South America. NAFTA is established as a trade
zone combining with three countries in 1994. The USA, Canada and Mexico are the part of this
trade agreement. Following the accomplishment of the trade, this turned as the world’s largest
free economy zone worth of six dollar trillion. The fundamental objectives behind the NAFTA’s
establishment are to abolish trade barriers related to the agriculture, manufacture and service
sector. Apart from that, it also attains to eliminate the restrictions on the investors leveraging the

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investment power. The small farmers in Canada and Mexico are expected to earn benefits in the
absence of red tape mechanism in the trading sector (Cherniwchan 2017). All three member
countries develop a comprehensive standard that needs to be maintained while doing the trade
under this free economic zone. The qualitative measure of NAFTA’s standard is significantly
better than the average national standard. The compensation laws for the American property
owners needs to be altered. NAFTA attains to empower the citizen of the Canada and Mexico
with more legal power. Inhabitants of these countries can appeal directly to the court to take
action against the USA investors if investment activities give negative external impacts (Blecker
2014).
Freight flow statistics – import/export and freight composition
Trade policies
Some commonly practiced trade policies are defined as follows.
Tariff: Tariff allows a country to impose a tax on the imported goods and services of other
countries. This intends to turn the imported goods expensive for the customers. Before NAFTA,
the export products to Mexico were levied by 30% tariff and the USA’s manufactured products
were charged by 250% higher tax rate. With the enactment of NAFTA, tariff rate gets reduced by
50% with an immediate effect. Furthermore, nontariff barriers got abolished in 2008 (Caliendo
and Parro 2015).

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Figure 1: Tariff distribution in three countries
Source: (Riley 2020)
Figure 1 infers that tariff rate is highest in the USA as compared to Canada and Mexico. In this
way, the USA attains to make the import goods more expensive for the consumers. However,
critics suggest that the USA government should reduce the tariff rate to encourage the exporters.
The average tariff on the export goods from the USA to Mexico and Canada is expected to be
zero in recent years.
Subsidies: Subsidies are used to improve the economic condition of individuals, manufactures
and institutions. This monetary initiative is often taken by the government. In case of trading
sector, subsidy policy is considered as a targeted tax cut. Under the NAFTA’s provision, $20
billion is assigned as a part of subsidy to the Mexico’s farmers from 1994 to 2009 (Appendini
and Bislev 2016). Meanwhile, this policy is criticized for its burdensome impact on the Mexican
traders.

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Quota: It acts as a government’s trade restriction on the monetary value of the goods that can be
allowed to import or export for a certain period. Quota is reported to have more effective
outcome when the imported goods of the USA and Mexico are less price-insensitive implying
that increasing price fails to reduce the demand (Bergsten 2017). Mexico is capable of accessing
65% of the tariff-rate quota under the provision of NAFTA.
Off-shoring: The practice of relocating the commodity and service from one country to another
country is referred as offshoring. Adoption of this trade policy results in the improvement of the
cost-savings and production skill. Nonetheless, NAFTA has caused anxiety for the
manufacturing workers in the USA resulting in that loss of over three million jobs.
Figure 2: employment in manufacturing sector in the USA and Mexico (2000-2017)
Source: (Economic View 2020)
From figure 2, it is obvious that the USA economy has been experiencing an
unprecedented job loss in the manufacturing sector. In 2000, more than 16 million manufacturing
jobs are swiped out compared to 4 million job loss in Mexico. The increasing trade deficit with

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other member countries under NAFTA is considered as the prime factor behind this huge job
loss of the USA manufacturing regime.
Foreign Direct Investment (FDI): The investment made by an investor of one country to
another country is termed as FDI. It is usually practiced in the open market. FDI offers better
growth prospects in terms of both capital investment and skilled labors (Barton 2017). Over $400
billion has been invested by the USA to Canada under NAFTA’s FDI policy and more than four
lakh jobs are created in Canada.
Critical review of current trade policies
Barriers: According to the researchers, elimination of the trade barriers has aggravated the
unemployment and trade deficit condition in the USA. During the last couple of years, more than
thousand jobs are displaced. It is difficult to establish a relationship between trade barriers and
unemployment (Zahniser et al. 2015). However, it is unavoidable fact that a large number of jobs
are shifted to Mexico. On the other hand, Mexico’s environment has received severe impact
following the NAFTA’s trade policies.
Challenges of the implementation:
First, NAFTA triggers a challenge to the small firms in Mexico. Small farmers have suffered a
huge loss due to the large competitive agribusiness. Lower wage, inferior working environment
and complex trade policy are the associated negative implications of NAFTA.
Second, USA exporters have to face more trade restriction as compare to the exporters of Mexico
and Canada after the implementation of NAFTA. This impedes the growth of the exporters
hailed from the USA. From figure 3, it can be inferred that export sector of Mexico has
performed better than the USA. Before NAFTA, the performances of the two countries were

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more or less same. However, the situation has changed during post-NAFTA. From 1996 to 2007,
the export earnings of Mexico have been going as compared to the export earnings of the USA.
Figure 3: Export trend between the USA and Mexico (1985 – 2007)
Source: (Banderasnews.com 2020)
Third, the USA manufacturing sector has experienced a job loss of over thirty-five lakh jobs as
the demand for non-college-educated employees gets declined. Government hardly considers the
expenditure on the import (Bergsten 2017). They always emphasize on the export earnings.
Henceforth, the continuous ignorance on the import expenditure aggravates the trade deficit level
of the USA economy. Following the enactment of NAFTA, the USA economy has registered a
remarkable loss in the trade balance sheet.
Fourth, under the NAFA’s provision, trucks are allowed to deliver products across three nations
without paying any extra licensing cost. However, this seemed like a daunting task for the trade
authorities due to its complex structure (Mumme 2016).

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Recommendations
First, NAFTA is recommended to havde at least fifty percent of the USA content to improve the
tariff-free status. A report state argues that it would boost the requirement of the North American
content to 85% from 62.5% (Hernandez-Trillo 2018). This surely boosts the trade volume while
reducing the trade cost, which in turn, mitigates pressure on the traders.
Second, the USA producers should get rid-off the anti-dumping laws in order to reduce the trade
restrictions on the perishable foods and seasonable goods imported from Mexico (Hernandez-
Trillo 2018). As a result, this may improve the agricultural export of the wheat, corn and the
products of Canada and Mexico.
Second, the negotiation process amongst three countries needs to be constructive as to get the
long-term effect of NAFTA. The trade agreements must be reviewed in respect of the changes in
the market structure (Soloway 2018). According to the market experts, NAFTA will no longer be
effective if the existing agreements are not reviewed in a proper way.
Third, NAFTA must develop a unique gender equality rules to eliminate the state oriented labor
laws. This would help to reduce the wage gap between the skilled and unskilled workers and will
improve the employment structure of the manufacturing sector.
Fourth, the provision of NAFTA must consider the enforceable dispute perseverance policies.
This helps in lowering the trade-dispute activities amongst the member countries. The trade
authority should keep a strong observation on the trading activities of the member countries
(Hakobyan and McLaren 2016).

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Final conclusion
On a concluding note, it can be stated that NAFTA has improved the trade volume of the
three countries with the complete elimination of the tariff and non-tariff barriers. However, it
causes a great threat to the USA economy as it has given detrimental impacts on the employment
and trade balance. NAFTA allows the small agricultural farmers of Mexico and Canada to trade
freely with the USA economy. However, this has turned into a great challenge for the small
producers in the global competitive market. Due to lack of efficiency, domestic producers lower
the product quality to meet the market demand. Meanwhile, the demand for the unskilled labor
falls drastically and large section of labor joins the Mexico’s workforce. This in turn surpasses
the available labor opportunities and enhances the unemployment level.

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Reference List
Appendini, K. and Bislev, S. eds., 2016. Economic integration in NAFTA and the EU: Deficient
institutionality. Springer.
Banderasnews.com. (2020). The Economic Benefits of NAFTA to the United States and Mexico.
http://banderasnews.com/0806/nz-benefitsofnafta.htm
Barton, L., 2017. The innovation of investor-state arbitration under NAFTA. In Globalization
and International Investment (pp. 127-135). Routledge.
Bergsten, C.F., 2017. Trade Balances and the nafta Renegotiation (No. PB17-23).
Blecker, R.A., 2014. The Mexican and US economies after twenty years of
NAFTA. International Journal of Political Economy, 43(2), pp.5-26.
Caliendo, L. and Parro, F., 2015. Estimates of the Trade and Welfare Effects of NAFTA. The
Review of Economic Studies, 82(1), pp.1-44.
Cherniwchan, J., 2017. Trade liberalization and the environment: Evidence from NAFTA and
US manufacturing. Journal of International Economics, 105, pp.130-149.
Economic View. (2020). Economy.com. Retrieved 7 April 2020, from
https://www.economy.com/economicview/analysis/296503/NAFTAs-Economic-Benefits-Are-
Manifold
Fas.org. (2020). [online] Available at: https://fas.org/sgp/crs/row/R44875.pdf [Accessed 7 Apr.
2020].

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Hakobyan, S. and McLaren, J., 2016. Looking for local labor market effects of NAFTA. Review
of Economics and Statistics, 98(4), pp.728-741.
Hernandez-Trillo, F., 2018. Mexico, NAFTA, and beyond. The International Trade
Journal, 32(1), pp.5-20.
Mumme, S.P., 2016. Scarcity and Power in US–Mexico Transboundary Water Governance: Has
the Architecture Changed since NAFTA?. Globalizations, 13(6), pp.702-718.
Riley, B. (2020). Is the US the ‘Least Protectionist Country’? Not Really.. [online] The Heritage
Foundation. Available at: https://www.heritage.org/international-economies/commentary/the-us-
the-least-protectionist-country-not-really [Accessed 7 Apr. 2020].
Soloway, J., 2018. Environmental expropriation under NAFTA Chapter 11: The phantom
menace. In Linking Trade, Environment, and Social Cohesion (pp. 131-144). Routledge.
Weisbrot, M., Lefebvre, S. and Sammut, J., 2014. Did NAFTA help Mexico? An assessment after
20 years (No. 2014-03). Center for Economic and Policy Research (CEPR).
Zahniser, S., Angadjivand, S., Hertz, T., Kuberka, L. and Santos, A., 2015. NAFTA at 20: North
America's Free Trade Area and Its Impact on Agriculture. United States Department of
Agriculture, Economic Research Service.